The Markets of Health: Part I

This post is the first part of a series on the health care and health insurance markets; this particular post deals with the characteristics of the health care market(s). The health insurance market(s) will be addressed in a future post.

There is a growing cacophony of voices, both among elected officials and the general citizenry, who are claiming that health care “is not a market.” Simply put, this assertion stems from a misunderstanding of microeconomics, both from the perspective of how markets work and – more crucially – how and how often they fail.

When I say health care is a market (or, to be more precise, a series of markets for services), I am merely stating economic reality. If I were to say health care is a well-functioning market, I would be careening into fantasy. However, a market that doesn’t function well is still a market, which means addressing those issues without recognition of market norms will simply replace market failure with government failure.

No two markets are alike, of course, and health care markets have distinguishing characteristics. Among the most prominent are…

Emergency situations shifting market power to the seller: This is the characteristic cited most often by market deniers, usually because they assume markets are supposed to work in diffusing economic power all the time. That just isn’t so. Indeed, health care is not the only market that has the “emergency effect”: heating repair during winter months, automobile repair in areas with poor public transportation, and a slew of plumbing repair scenarios are but a few of the myriad emergency effects that rob consumers of market power they would normally have.

Lack of price transparency: This is a common complaint from the right and center-right, but the complaint is not exclusive to them. Again, however, opaque prices is hardly limited to health care. Several of the above markets with emergency effects also have transparency issues (indeed, lack of transparency can add to emergency effects).

These issues do create problems, and can of course lead to the market creating less than optimal outcomes. In microeconomics, we call that market failure, and it can be quite common even in competitive markets. Again, however, market failure does not eliminate market existence. It does mean – as determined by electorates since at least the beginning of the 20th Century – that government is expected to address the failures.

That isn’t the end of the discussion, however. Government intervention to address a market failure can (and often does) lead to subsequent effects that rival or even exceed the damage done by market failure (this is called, of course, government failure). Indeed, government regulations have had impacts on the health care markets. To wit…

Unnecessary restrictions in health care supply: To be fair, the federal government’s impact on the number of doctors and medical facilities, while not trivial, pales in comparison to what states are doing with their hideous Certificate of Public Need regimes. Based on the bizarre notion that controlling health supply somehow curtails demand, COPN/CON regimes have done exactly what one would expect of regulations that block new providers from entering the market place – they’ve led to fewer providers able to charge higher prices for less service. Meanwhile, Washington – despite telling the electorate repeatedly how important health care is as a policy – has done nothing to examine health care supply effects on matters such as immigration reform, education reform, tax policy, or nearly anything else that doesn’t say “health care” in bold type.

Acquiring, and then offloading to the AMA, pricing power: While the focusing on the market power the federal government has acquired via Medicare and Medicaid usually focuses on prescription drugs, in fact the Center for Medicare and Medicaid Services (CMS) has – and in theory uses – its market power in medical services quite often, setting rates for services that are even followed (to an extent) by private medical insurers. Yet this monopsonistic (i.e., literally, single payer) power acquired by CMS is largely used by its price setting “advisor” – which is none other than the American Medical Association. This is the equivalent of house-shopping, falling in love with a house, and naming the current owner of said house as your realtor. Yet that is how health care prices (by and large) are set in the United States of America. It’s maddening.

Assumption of default risk falls heavily on the provider: This may be the most unusual aspect of health care, driven in no small part by federal law which mandates hospitals treat (at least partially) any patient who comes in to an emergency room. This is led to a cultural norm where the buyer is given the service long before payment options are even arranged (due to the insurance effect). As I mentioned earlier, the health insurance market is separate enough for its own post, but it has in part led to this state of affairs. In effect, sellers are also lenders (much like car dealers, house sellers, furniture stores, etc.), except that none of them are assumed to run credit checks on buyers. Thus, the normal procedures that sellers can use to avoid risk of default aren’t available to health care providers (including repossession, obviously).

Again, these factors don’t suddenly make health care “not a market.” They do make health care a unique set of markets, requiring certain policy interventions to improve outcomes. In my humble opinion, said policies would focus on increasing health care supply, in part by addressing the aforementioned default risk (especially as the latter is in no small part driven by government policy in the first place), encouraging greater price transparency (and not just in health care, by the way), and breaking the CMS-AMA pricing lock.

Of course, these should not be seen as addressing health insurance, which is a different market with its own issues. It is to say that for health care, market failures can be addressed – and should be addressed – but in a matter the recognizes how markets work in general and how health care markets work (and don’t work) in particular.